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Choose an Annuity You Can Ride for Life
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July 2006
Longevity Insurance
Running out of money is rarely a big concern in the early years of retirement. To protect the oldest of the old, a few companies are offering annuities that act more like insurance. You set aside a small amount of money when you retire, or even earlier. You get your first checks when you reach a designated age.
For example, if you make a one-time $25,000 investment in Metropolitan Life's basic Retirement Income Insurance fixed-rate annuity at age 60 and are still alive at age 85, you'll receive $24,300 a year for the rest of your life. If you invest at age 55, you'll receive $38,000 a year starting at age 85.
But if you die before age 85, you don't get anything. If that doesn't appeal to you, you can add a feature that pays a death benefit to your heirs if you die before the designated payout date. The death benefit would equal the amount you paid in, plus 3% a year since the date of your investment.
But this feature means smaller payouts to you if you live past 85. So if you start investing at age 60 and you die at age 85, your heirs will get $52,000. If you live beyond 85, you'll receive $16,400 a year compared with the $24,300 you would have received if you had not signed up for the death benefit. To maintain the maximum income for yourself, you may instead decide to buy life insurance for your heirs.
Personal Pension
It's difficult to calculate how much you can safely withdraw from savings each month. "Your whole life, everything's calibrated on income-how much to spend on housing and everything else," says Aaron Fried, vice-president of MetLife. "Then you retire and have this lump of cash, and people don't know what to do with that."
As the number of employer-based pensions dwindles, a few insurers, such as MetLife and New York Life, are offering a form of personal pension financed while an individual is still working and saving for retirement. In addition to investing in your 401(k) now, you can divert a portion of your take-home pay to buy a guaranteed monthly income after you retire.
For example, if you start investing $100 a month in MetLife's Personal Pension Builder at age 35 and increase the amount by 3% a year, you'll receive a lifetime monthly payout of $800 starting at age 65. If you start at age 45, youll end up with a monthly payout of $345 starting at 65.
More Flexibility
Many retirees decide against annuities because they worry that they'll die soon after buying or that they'll want their money in an emergency. So New York Life added more liquidity to its Lifetime Income annuity. If you need quick cash, you can receive five payments all at once, although you won't receive payments for the next five months. Or you can take a one-time withdrawal from the annuity even after you've started to receive payouts (you can only exercise this option in certain years or in the event of specific disasters).
For example, you could withdraw 30% of the total value of the remaining payments that are expected to be paid, based on your life expectancy when you purchased the policy. You would still get payments for the rest of your life, but they would be reduced by 30% from what you would have received otherwise.
Several companies also allow you to adjust your lifetime payouts for inflation. New York Life's Lifetime Income lets you increase payouts by 3% or 5% a year, in return for a smaller payout in the beginning. Vanguard will adjust payouts based on the consumer price index, but your monthly income will be lower in the first several years.
These options come at a cost. With the New York Life annuity, a 75-year-old man who invests $100,000 in the life-only annuity would receive an annual income of $11,072. But the annual payout would fall by varying amounts, depending on whether he chooses a death benefit, inflation protection or a guarantee of a refund (see the table).
Vanguard's Rinaldi recommends that you figure out how much to invest in an annuity by first determining your expenses in retirement. Then subtract your sources of income, such as Social Security and pension benefits. You can then buy an annuity to fill in all or part of the gap. But before you settle on a product, compare payout rates at www.immediateannuities.com. Because you'll want some liquidity for emergencies and other expenses, Rinaldi recommends that you don't spend more than 30% to 40% of your total assets on an annuity.
The Cost of Flexibility
Inflation protection, death benefits and other features are great. But they will reduce your monthly income. Here are the payouts based on a $100,000 investment with New York Life's Lifetime Income annuity.
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Life Only |
Life with Cash Refund* |
Life with 25% Death Benefit |
Life Only 3% Annual Increase** |
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| Male age 65 |
$8,398 |
$7,643 |
$7,639 |
$6,427 |
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| Male age 75 | $11,072 | $9,133 | $9,731 | $9,091 |
*Guarantees you'll get back your entire investment.
**Payouts will increase by 3% per year |
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